Request For the Day

If anybody has any interesting ideas on how to reform Social Security that do not involve a) transitioning to private accounts or b) mass murder, I'd love to hear them . . . .

What is Paul Krugman Talking About?

I just reread Paul Krugman's old post on why there is no problem with the Social Security Trust Fund assets.

His argument:

The Social Security system won’t be in trouble: it will, in fact, still have a growing trust fund, because of the interest that the trust earns on its accumulated surplus. The only way Social Security gets in trouble is if Congress votes not to honor U.S. government bonds held by Social Security. That’s not going to happen. So legally, mechanically, 2018 has no meaning.

. . .

What we really have is a looming crisis in the General Fund. Social Security, with its own dedicated tax, has been run responsibly; the rest of the government has not. So why are we talking about a Social Security crisis?

To be honest, I don't really understand Krugman's point.

The assets in the Social Security Trust Funds represent a claim against the United States Treasury. In other words, Treasury has borrowed from the Social Security Trust Funds to finance its current spending, and it will eventually have to repay that debt.

When the Social Security program begins to cash in those assets (probably some time in 2016), Congress has three (potentially interchangeable) options to finance the repayment of its debt: raise taxes, cut spending, or add to the already unsustainable deficit.

None of these options is particuarly appealing. The combined Trust Funds contain approximately $2.6 trillion in assets, which means that the federal government will have to find $2.6 trillion in revenue over the next few decades.

Krugman wants to reframe the problem as a crisis in the General Fund rather than the Social Security Trust Fund itself. And, technically, he's probably right. But how does this really change anything? The federal government still has to make a series of difficult choices ahead. Choosing the wrong path could still place the Social Security system and the entire federal budget in jeopardy.

Viewing the problem this way may be politically appealing to Krugman, but it's not exactly helpful.

Does Social Security Create Poverty?

I recently came across this piece by Edgar Browning -- the author of my microeconomics textbook -- in which he suggests that Social Security actually increases poverty rates among elderly Americans by crowding out private investment.

It's an interesting contention, though I'm not quite convinced by it.

Putting Browning's argument aside, though, I think there's a pretty obvious problem with a Social Security system that simply collects taxes and disburses benefits without affording Americans the opportunity to make their own financial decisions.

Today, financial literacy in the United States is pretty dismal. I can't help but feel that most Americans would be a bit more savvy if they actually had more personal control over their money . . . and if their retirement really depended on them making good decisions.

(Interestingly, a strong plurality of Baby Boomers may be collecting Social Security income at age 62, rather than the "normal retirement age," due in part to financial necessity.)

Update: Freakonomics's Stephen Dubner points to this study on financial literacy:

[F]ewer than one-third of young adults possess basic knowledge of interest rates, inflation, and risk diversification. Financial literacy is strongly related to sociodemographic characteristics and family financial sophistication. Specifically, a college-educated male whose parents had stocks and retirement savings is about 50 percentage points more likely to know about risk diversification than a female with less than a high school education whose parents were not wealthy.

The Basic Problem of Social Security Reform

A brief primer, for anyone who's interested:

For more than 70 years, the federal Old-Age, Survivors, and Disability Insurance program (OASDI) – commonly known as Social Security – has provided social insurance to a substantial number of American citizens. Though it was initially envisioned as a safety net for elderly retirees, the program has been expanded intermittently since its inception to include additional categories of Americans. In 2005, the Social Security Administration (SSA) disbursed benefit payments to more than 47 million Americans, with retirees still composing the largest group of beneficiaries (28 million).

The OASDI program is financed through a dedicated federal payroll tax, and its revenue stream depends entirely on current wage earners. In recent decades, the ratio of wage earners to retirees has narrowed substantially as birthrates have declined and life expectancies have increased. With the Baby Boom Generation beginning to collect benefits, this “dependency ratio” will continue to tighten, further diminishing the program’s revenue base in the upcoming years. By 2016, the OASDI program’s outlays to beneficiaries are expected to exceed revenues. Thus, if current trends continue, the Social Security program will likely face a long-term deficit in the coming decades.

Reforms passed in the early 1980s have enabled to the OASDI program to move away from its original pay-as-you-go structure and build up a substantial revenue surplus. These additional monies have been invested in U.S. securities and placed in trust. While the assets in the Social Security Trust Fund will help to maintain payments to beneficiaries after OASDI outlays begin to exceed revenues, these assets can only fill the revenue gap for a short time. According to best-guess assumptions, the Trust Fund will be depleted as early as 2037. After this point, projected receipts from payroll taxes will only cover approximately 76 percent of all benefit payments.

The goal for policymakers and other interested parties is to address this looming deficit crisis, and to confront the trade-offs among different reform options. There are a number of important considerations in crafting a solution to the problem of Social Security reform. Those who seek to resolve the deficit crisis must first develop a set of evaluative criteria to assess the impact of various policy options. Applying these criteria to different options will enable decision-makers to systematically assess the merits of each approach, and then choose the most appealing alternative.